Sweden is prepared to increase its budget deficit to as much as 3 per cent of output to support its banks and stimulate economic growth in 2013 should the European debt crisis escalate, finance minister Anders Borg has said.

The government may spend between 0.5 per cent and 1 per cent of gross domestic product on demand-inducing measures, such as household tax cuts and local government aid, and the same share in assistance to banks. Lower tax income and higher unemployment benefit payouts may sap public finances by another 0.5-1 per cent, Borg said. Sweden would still have strong enough public finances so that interest rate spreads wouldn’t rise in a “serious way,” Borg said. “We will then raise the deficit to perhaps 2-3 per cent, but all other countries should have larger ones so that we still, in relative terms, are the stable country.”

Eroding demand for its exports from Europe is undermining growth in the economy. Sweden sells about half of its output abroad, of which about 70 per cent goes to Europe. – (Bloomberg)